Budget watch in world facing a ‘fragile conjuncture’ of risks

Thursday May 05, 2016Dr Ganesh Nana

This year’s Budget has all the hallmarks of one ‘treading water’. There will be strenuous efforts expended to make it look like something is being done; but, without the will to wish to do anything. With the accounts showing a borderline surplus (or deficit), the chances of any significant tax relief will remain on the backburner.

The shadow of the Auckland housing market imbalance spilling over to neighbouring regions will pepper the narrative and accompanying commentary. However, the will to comprehensively address the imbalance will remain absent. More likely will be further exhortations to local authorities to release land and relax planning constraints.

Of course, given the success in convincing most that our economic situation is sound and prospects are positive, it can be argued that a ‘treading water’ Budget statement is precisely what is needed.

However, while the headline job numbers for March are strong, the details are less convincing. The 48,000 recorded gain in job numbers over the year to March is particularly impressive. However, as outlined in our March briefing, such growth is insufficient to forestall a rise in jobless as migration and population growth increase further. The big but though is that the 48,000 number borders on questionable when considering it includes a reported 14,000 lift in jobs in the primary sector. This equates to the 2nd highest growth rate in this sector’s jobs in the past 24 years!

Our suspicions are that the overall job growth is currently a lot closer to the 35,000 mark, which in turn would put the unemployment rate closer to 6%.

Alternatively, the chances of New Zealand escaping unscathed from a global economic slowdown are remote.

The IMF’s World Economic Outlook released in April was noticeable in its lack of confidence in the robustness of the global recovery. Titled “Too Slow for Too Long” this report not only revised down global economic growth expectations for 2016, it further highlighted that “…uncertainty has increased, and risks of weaker growth scenarios are becoming more tangible”.

While noting a worryingly-phrased “fragile conjuncture” of risks, the IMF hopes for a growth pickup in 2017. But, in a less than convincing mood, the IMF then presents a list of assumptions that underpin this hope of a 2017 pickup. In particular, there needs to be:

a gradual normalisation of conditions in several economies currently under stress

a successful rebalancing of China’s economy

a pickup in activity in commodity exporters

resilient growth in other emerging market and developing economies.

Underlying this outlook are concerns that not only is the world economy stalling, but that central authorities and governments are out of ammunition in terms of a policy response. Indeed, a chilling picture is painted “… with risks of a stagnation scenario with persistent negative output gaps and excessively low inflation”. As illustrated, inflation rates around the globe are remarkably low. And note that a negative output gap is where GDP remains below potential, with capacity consequently lying idle.

In this context, the IMF implores governments and agencies on the “… urgency of a broad-based policy response to raise growth and manage vulnerabilities”. In particular, the IMF calls for a 3-pronged approach of mutually reinforcing “structural reforms, continued monetary policy accommodation, and fiscal support”.

With close to a decade since the onset of the Global Financial Crisis, it is sobering indeed that the global recovery remains so fragile. As if to underline its concern, the IMF signs off with “the threat of synchronised slowdown, the increase in the already significant downside risks, and restricted policy space in many economies call for bold multilateral actions to boost growth and contain risks at this critical stage of the global recovery”.

In the context of such a faltering global economy the New Zealand authorities (Government and Reserve Bank) will be wanting to keep their powder dry. Interestingly, the potential to loosen government spending as a means to counter any cyclical slowdown was signalled in late 2015.

Of course, with interest rates at record lows (government 10-year borrowing rate below 2.5%), the argument to accelerate long-term public sector infrastructure investment spending to lift trend (as well as cyclical) growth also holds considerable merit. We suspect, though, such a move is unlikely given the preference for quicker returns on funds invested amongst the Wellington commentariat.